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In 2023, the global economy is “slowly” moving forward. According to the International Monetary Fund (IMF) forecast, global growth will fall to 3% this year, instead of 3.5% last year, and continue to decline to 2.9% next year, much lower than the average economic growth rate in history.
The Israel-Hamas conflict adds another punch to a body that has not yet fully recovered, making economies that are already experiencing low and uneven growth even more unstable.
Precarious
World Bank President Ajay Banga has warned that the world is in a “very dangerous” moment. All conflict scenarios could push energy prices to record highs, inflation higher and global economic growth to slow. Experts say that conflict in the Middle East could create new challenges and increase uncertainty for the global economic outlook.
In fact, the unrest in the Gaza Strip and the Russia-Ukraine conflict have become the biggest shocks to commodity markets since the 1970s. According to World Bank chief economist Indermit Gill, if the conflict continues to escalate, the global economy will face its first dual energy shock in decades, fueling inflation again, after efforts by central banks to tighten monetary policy.
Oil prices have risen 6% since the Israel-Hamas conflict, while agricultural, metal and other commodity prices have barely budged. Based on the history of regional conflicts since the 1970s, the World Bank report forecasts three scenarios of increasing severity.
In an optimistic scenario, with an impact similar to the situation in Libya in 2011, oil prices could increase by 3-13% to $93-102/barrel.
If the risk of disruption is moderate, as in the Iraq incident in 2003, oil prices could rise to $109-121 per barrel.
In the most severe scenario, oil prices could peak at $140-157 per barrel, surpassing the highest level since 2008.
IMF chief economist Pierre-Olivier Gourinchas said that a 10% increase in oil prices would reduce global economic growth next year by 0.15 percentage points, while inflation would increase by 0.4 percentage points.
In the World Economic Outlook Report for the second half of 2023, the IMF pointed out three main risks facing the world: inflation, financial market instability, and the intertwining of geopolitics and protectionism.
Rising energy prices due to the impact of conflicts are the first risk. Among them, the risk of the Israel-Hamas conflict spreading, with the possible involvement of the close relations between Iran-Hamas and the US-Israel, is likely to tighten the supply in the oil market and push up energy prices.
The second risk is financial market stability. Over the past two years, central banks have failed to complete a long and continuous path of raising interest rates to contain inflation. Rising debt costs are an expected result of tight monetary policy. Higher interest rates can exacerbate financial market vulnerabilities, leading to increased defaults.
New protectionism?
Considered the third risk to the world economy, the intertwining of geopolitics and trade protectionism, which impedes international trade and investment, is the biggest problem, with the potential for the most far-reaching impact.
International trade is the engine of global economic growth, but this engine is weakening. The US-China strategic competition and the Russia-Ukraine conflict have made multinational companies consider geopolitics as a variable to consider. The Israel-Hamas conflict has made multinational companies pay more attention to geopolitics.
In the article “The real enemy of the global economy is geopolitics, not protectionism”, Harvard University scholar Dani Rodrik emphasized that the biggest risk facing the global economy comes from the competition between the world's two leading powers, the US and China, which can affect everyone.
The author's analysis in the article is quite suitable for the current global economy - a world that is more unstable and prone to conflict. The world is witnessing the rise of fragmentation, increasing barriers to trade and investment, the extreme form of economic corporatization, economic globalization evolving in a different way.
China and the United States have shown signs of improving their relations recently, but the Israel-Hamas conflict has had a negative impact on the strategic competition between the two countries. Geopolitics has become a key factor hindering global economic development.
US-China trade is no longer a “catalyst” for peace, but strategic competition between the two giants is changing the global supply chain.
Sharing the same view, in the article “Free Trade in a Fragmented World”, Economics Professor Craig Emerson analyzed that when two superpowers compete for supremacy and most of the world returns to protectionism, middle powers pursue new paths.
Some countries show a tendency to align with one superpower or another for strategic and economic purposes, while others remain neutral.
If in the past half century, countries large and small have benefited from the process of global integration. The trend of expanding economic borders and strong connectivity in the view that countries are economically interdependent is less likely to consider conflict.
Now, as protectionism returns, domestic producers need protection from foreign competitors and to ensure the survival of domestic industries, a new process of global decoupling begins.
Notably, President Donald Trump’s statement, which was later passed on to his successor, that in the competition with China, America would become great again by bringing jobs and industry back home. Not only that, for reasons of national security, many products imported from other countries are forced to be restricted, or subject to a special tariff…
Meanwhile, China has long persisted in implementing a series of industrial policies, including trade protectionism, despite criticism from Western countries.
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